Hon Hai Precision Industry

Hon Hai Precision Industry is a Taiwan-based company involved in the manufacture and sale of computer, communication and consumer electronics products. The company has manufacturing sites in Asia, Europe, Mexico and South America but its largest production facilities are based in Mainland China. Established in 1974, Hon Hai is now one of the largest electronics manufacturing service providers in the world, with 1.3 million employees and clients such as Apple, HP, Nintendo and Sony. Hon Hai has a free float of about 75%, with its founder and combined chair/CEO owning about 13%.

Background
Hon Hai has been involved in several controversies relating primarily to the treatment of its employees in China with regard to working conditions and wages, which was the initial focus of our engagement. Over time, however, our engagement has progressed from the company’s approach to labour practices to human capital management more broadly, as the competitive business environment the company is in calls for a change in its business model.

What we did
While its early success has been linked to the popular brands of its customers, more recently the company started to offer its own products and services. The acquisition of Japanese electronics firm Sharp showed a commitment towards innovation in its consumer products. At the same time, serious competitors in its core business have emerged. Against this background, we have encouraged the company to become more transparent in its objectives, strategy and business model. We had a series of engagement meetings with its senior executives to discuss these issues, visited its Shenzhen operations and developed a strong working relationship with the head of investor relations and the adviser to the chair/CEO. We also led a collaborative engagement, which included delivery of a statement at the company’s 2014 AGM on behalf of a group of investors owning more than 300 million shares, around 2.3%, of the company. We produced our own statement at the 2015 AGM, again using the opportunity to put our concerns and suggestions directly to the chair/CEO. In September 2015, the adviser to the chair/CEO joined us via teleconferencing at our Client Advisory Council for a live engagement meeting with a small group of responsible long-term asset owners. His presentation about human capital management, corporate governance, developments and plans for the future demonstrated the company’s progress and willingness to address more openly the concerns we have raised. The adviser credited our feedback with contributing to the improvements Hon Hai has made.

In the fourth quarter of 2016, we visited a new key manufacturing site of the company and examined the residential quarters of its employees, as well as training and recreational facilities. We discussed how its at-risk processes are now subject to additional physical and procedural safeguards. We also addressed employee benefits systems and grievance mechanisms with the vice chair of the labour union. We were able to speak to a group of assembly line workers on their maternity leave about their perception of the company, without any staff present, whose feedback was positive.

Results
The company has made good progress on employee relations issues as verified by an independent assessment of the Fair Labor Association in 2012. Following our intensive – robust but friendly – engagement, the company has also progressed on transparency and communications. It has enhanced its disclosure, launched its vision and strategy website in March 2015 and published an improved sustainability report in 2015, incorporating the suggestions we have made during our engagement. An audit committee composed of three new independent directors was set up in 2016.

In early 2017, a third-party research firm took the company off its controversial companies list.

However, with regard to board composition, effectiveness and succession, we have so far only been given limited assurance. We have also started discussing the company’s disclosure of climate change and environmental performance and continue to push for better access to independent directors.